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Millennial Spending Is About To Soar And These Stocks Could Soar With It



Oscar Quinones, 28, what in
            Nike
             's
      Manhattan flagship store on Fifth Avenue, and he was speaking out of reverence, not disgusting. Nike gear.

"I walk in and out of the shoes, how they're made, and how Nike comes up with their designs, "Quinones, a nursing student from the Bronx, told Barron's. He was there to pick up his 17th pair of Nikes, the first ones he had designed and customized online: a glow-in-the-dark Kobe A.D. Sneakers with the initials

Millennials like Quinones are being aggressively wooed by Nike (ticker: NKE) and other marketers, and for good reason. The millennial generation, consumers in their mid-20s and 30s, is overtaking the baby boomers as the greatest generation of shoppers in history. By 2020, millennial spending will account for $ 1

.4 trillion in U.S. retail sales, according to the consulting firm
            Accenture
            .
      That's $ 5.7 trillion total, according to eMarketer.

Talkin '' Bout Our Generations

The Generation Of The Generational Cohorts Wants To Be Over The Next 20 Years.

Generation As Of 2019

Silents

Born 1928-45

Ages 74-91

Generation X

b. 1965-80

Ages 39-54

Generation Z

b. 1997-2012

Ages 7-22 *

Boomers

b. 1946-64

Ages 55-73

Millennials

b. 1981-96

Ages 23-38

Boomers

Born 1946-64

Ages 55-73

Silents

Born 1928-45

Ages 74-91

Generation X

Born 1965-80

Ages 39-54

Millennials

Born 1981-96

Ages 23-38

Generation Z

Born 1997-2012

Ages 7 -22 *

This year, the oldest millennials are turning 38-a prime age for young families and household formation. 30 years and 40s, and then tapers off in their 50s, according to Census Bureau data. The youngest millennials, in their early 20s, are finishing up at college and graduate school and are looking at workforce at a time when jobs are plentiful and demand for young people.

The maturing of the millennials wants to lift spending

"Clearly, one would expect spending millennium to increase healthily over the next decade or so," says Richard Fry, a senior researcher with the Pew Research Center.

The demographic changes are not all positive. Millenials will eventually pick up the slack as their incomes rise, but it will not happen overnight. In the meantime, investors should seek the industries and companies with "niche demographic tailwinds," says Pat Tschosik, an analyst who studies demographic trends with investing research firm Ned Davis Research.

How do you take advantage of these shifts?

One could invest in companies whose This is a scattershot approach to what is a vast universe. Companies as different as
            Amazon.com
            
      (AMZN) and
            General Motors
            
      (GM) get pitched as investments because of "secular" demand by millennials.

Some exchange-traded funds bundle it all together. The
            Global X Millennials Thematic
            
      ETF (MILN) holds about 80 stocks that have a "high likelihood of benefiting from the rising spending power and unique preferences" of millennials. It is composed of companies like
            alphabet
            
      (GOOGL)
            Costco Wholesale
            
      (COST),
            Facebook
            
      (FB),
            Starbucks
            
      (SBUX), and
            Walt Disney
            
      (DIS). Another ETF,
            Principal Millennials Index
            
      (GENY), holds a basket of global growth companies, including an Australian education business,
            Navitas
            
      (NVT.Australia), the Japanese retail giant
            Fast Retailing
            
      (9983.Japan), and Chinese internet stocks
            Alibaba Group Holding
            
      (BABA) and
            Tencent Holdings
            
      (TCEHY).

While millennials certainly matter to these companies, they are hardly the only drivers of the stocks. Valuations, competitive pressures, and earnings are likely to be as influential as a generational shift in spending.

Barron's has identified five stocks that should benefit from millennial spending and are attractive for other reasons, as well. Here are our millennial plays, two well-known big names and three smaller, more speculative picks:

Millennial spending will account for 25% of total U.S. retail sales in 2020,

or $ 1.4 trillion annually.

Millennial spending will account for

25% of total retail sales in 2020, or

$ 1.4 trillion annually.

Subscription services, as Barron's highlighted in a December cover story, are thriving. Millennials are not the only ones behind the trend. But plenty of research indicates that young people prefer to spend more than older generations. According to Accenture, 77% of both the Millennial and Gen Z generations say they are interested in curated subscriptions to products or services. Legion of companies are now adopting subscription-revenue models for IKEA and electric-toothbrush heads (Philips).

That's the opportunity for
            Zuora
            
      (ZUO), a small but fast-growing software company. Zuora sells a cloud-based platform to handle back-office functions for subscriptions, such as billing, revenue recognition, and analytics.

Its customers include auto makers GM,
            Ford engine
            
      (F),
            Kia Motors
            
      (000270.South Korea), and
            Toyota engine
            
      (TM); HBO Go (the direct-to-consumer service); office-productivity company
            box
            
      (BOX); and
            Caterpillar
            
      (CAT).

Millennial Spending Wave

This year, the oldest millennials are turning 38-prime age for young family and household formation and picking up.

Caterpillar's mining earth movers, for instance, are operated remotely with GPS and robotics. Companies pay subscription-based fees for maintenance and upgrades of equipment, and the company uses Zuora to handle its subscription revenue. Trucking companies are also using subscription software to keep track of hours and miles driven, using Zuora as the go-between.

The idea is to "sign up new customers, increase spending by customer, benefit from increased customer usage, and retain as many of those customers as possible," says David Meier, a portfolio manager with Motley Fool Asset Management, which owns Zuora in the MFAM Small-Cap Growth ETF (MFMS).

Zuora's sales are expected to reach $ 292 million in its fiscal year ending in January 2020 from $ 235 million in fiscal 2019. Analysts expect the company to loose 43 cents a share this fiscal year. Yet the losses are narrowing as revenue increases and cash flows cover more of its operating expenses. The company has more than enough cash on its balance sheet, at about $ 180 million, to sustain the business for several years without another equity issuance.

"This is a growth story," says Scott Berg, an analyst with Needham who has a $ 21.50 price tag.

Zuora's end market wants to be one of the fastest-growing in enterprise software over the next five years, expanding at a 25% annualized rate. Its revenue should grow at that rate, Berg estimates. The valuation looks reasonable, with the stock trading at 5.8 times enterprise value to sales, just below the median for software-as-a-service companies.

Millennial Mindset

than any other generation.1

identify as White / Non-Hispanic, down from 78% of young adults in 1980.1

think business success should be

other generation.

other generation.

other generation.

other generation .1

identify as White / Non-Hispanic, down from 78% of young adults in 1980.1

think business success should be

measured in terms of more than

financial importanc e.3

Amount that millennials spend per month on services as video and music4

Zuora CEO Tien Tzuo tells Barron's that profitability is not the company's near-term priority. "We see this is a long-term game," he says. In the auto industry, he says, subscription models and car-sharing will be much more prevalent a decade ago, requiring subscription to the billing and other tasks. He also sees the rise of connected devices like Internet-enabled thermostats and the broader Internet of Things.

Subscription-based revenue models are growing at five times the pace of the average S & P 500 index company, he says , If he's proved right, Zuora's stock could double over the next five years.

Whether or not luxury department stores survive, millennials are likely to buy more luxury goods online. By 2025, 25% of luxury items will be online, up from 10% in 2018, says the consulting firm Bain & Co. Much of that growth is driven by millennials and Gen Z, who wants to account for 45% of total luxury Sales, up from 32% in 2017.

            Farfetch
            
      (FTCH) aims to profit from the spending wave. An online platform for luxury brands, the site is a mash-up of fashion magazines and high-end boutique. Chloë Sevigny, who recently showcased a Gucci tweed coat ($ 4,980) and Miu Miu's leopard print trench coat ($ 3,650).

Fashion is a globally inefficient industry Small boutiques and brands in Europe, Japan, and other regions handle cross-border sales, shipping and inventory management in small batches. Farfetch provides all of that on a global scale, including same-day delivery in 18 global cities. Opinionist Jason Helfstein wrote in a recent report.

Farfetch is gaining traction. $ 1.4 billion in 2018, up from $ 910 million in 2017. Active users climbed to 1.35 million from 936,000. Farfetch has been acquired
            JD.com
            
      

Farfetch went public in September at $ 200 and trades around $ 25. Company insiders owns more than one share of the shares, and the stock could be face selling pressure after the lockup period, which expired on March 21. Other risks include a slowdown in sales in the Middle East and Asia-Pacific, fast-growing regions for the company. Analysts expect the company to lose 61 cents a share in 2019 and 45 cents per share in 2020. The shares trade at about 11 times sales, a 50% premium to the industry, according to FactSet.

Notes: E = Estimate; NM = Not Meaningful; * For Fiscal 2020 ending on 1/31/20; ** For Fiscal 2019 ending on 5/31/19

Sources: Bloomberg; FactSet

But Farfetch has no debt on its balance sheet, $ 850 million in cash on hand, and minimal inventory. Sales are expected to increase 30%, to $ 1.1 billion in 2020 from $ 822 million this year. Helfstein estimates that Farfetch wants to make a modest profit of $ 20 million in 2022, based on adjusted earnings before interest, taxes, depreciation, and amortization.

The business looks defensible against Amazon.com, says T. Rowe Price fund manager Jay Nogueira , "The high-end brands do not want to be on Amazon," he says. "The addressable market for Farfetch is massive, and platform like like this will be winners."

Housing should get a boost as millennials form households and have children.

Millenials have moved out of their parents' homes (with 85% no longer living at home). And they appear to be buying after years of renting; owner-occupied households increased to 64.8% in late 2018 from 62.9% in early 2016, while renter-occupied households were dipped by 1.9 percentage points, according to the Census Bureau. Tschosik estimates that there is pent-up demand of at least two million housing units by millennials which had been delayed buying because of the recession and weak job market.

Home builders targeting first-time buyers, such as
            KB Home
            
      (KBH), should see some benefits from this wave. But first-time buyers are more likely to purchase older homes; 47, making a new house more of a trade-up.

That should benefit
            Home Depot
            
      (HD), as millennials buy older homes and fix them up. Household spending on home improvement.

Home Depot's stock has lagged behind the broader market over the past year, gaining about 8%. Wall Street's sentiment on the stock has soared a bit as the housing market weakened and the company's estimates for same-store growth in its last quarter. 12 months' earnings.

Yet the retailer's core sales trends still look healthy. The company expects same-store sales to increase 5% in 2019, similar to its growth rate in 2018. Spending on home improvement should continue to rise.

Home Depot has better locations than its chief rival
            Lowe's
            
      (LOW), RBC analyst Scot Ciccarelli says. More of HD's stores are located in dense urban areas, supporting higher foot traffic per store and stronger sales to professional contractors, one of HD's faster-growing and higher-margin businesses.

Home Depot's stores are also concentrated in areas with higher household There's a structural advantage over Lowe's, Ciccarelli says. And Home Depot is investing heavily in e-commerce to fend off Amazon; the company is spending $ 1.2 billion over the next few years to expand the distribution of big or bulky goods with same-or next-day delivery.

The stock is not likely to outperform. But the demographic elements look favorable, and there should be quiet in the future. The stock yields 2.7% and the recently authorized $ 15 billion share-repurchase plan, equal to about 7% of its market value. Ciccarelli sees the stock reaching $ 223 over the next year, up from recent prices around $ 200, based on a multiple of 22 times estimated 2019 profits.

Families moving from That's advantageous for
            Lovesac
            
      (LOVE)

Lovesac's couches and other furniture can be reconfigured, accessorized, and customized into thousands of arrangements like interlocking lego pieces. The cushions are made of recycled bottles – appealing to millennials. – The furniture does not have to be in the landfill or sold on Craigslist.

"Brian Butthrow, portfolio manager of the Wasatch Micro-Cap Value fund (WAMVX), which owns the stock, says:" They're a disruptive name in the furniture space. " Lovesac derives most of its sales from showrooms, online, and shops-in-shops within Costco. It has gross margins of 55%, well above rivals like
            RH
            
      (RH) at 40%.

Lovesac went public in June 2018 at $ 16 and now trades at $ 42. Analysts expect the company to loose 22 cents a share in the current fiscal year, which ends in January 2020 and earn seven cents a share in the next fiscal year. The stock trades at three times business value to sales, well above average for furniture retailers.

Lovesac, however, is expanding rapidly. It is expected to report $ 239 million in fiscal-2020 sales, up 44% from fiscal 2019. The company is running at close to break-even because it is plowing into business, Bythrow says. "We're in a period where investors are rewarding companies that reinvest for growth," he says. "That might change. But you can not go through with that today. "

Nike's appeal rest on spending assumptions by millennials, along with moves the company is making its lineup and retail shopping experience. Jill Standish, head of Retail for Accenture

The ability to design their own sneakers at kiosks at flagship stores is helping to keep Amazon and other pure online retailers. Nike's SNKRS app is also resonating with young shoppers, says Camilo Lyon, an analyst with Canaccord Genuity, and the company is doing a good job of driving sales through a combination of digital and in-store experiences.

"Nike is focused on driving the consumer experience across all the components of their business, "he says.

Lyon points out that Nike's innovation machine is cranking up; it includes the launch of a new cushioning platform in running shoes and a renewed focus on women's apparel and footwear (such as its Air Max Dia shoe).

So, Nike's plans to drive down from its upscale footwear to "core" sneakers priced below $ 100, an initiative that could take share from
            Under Armor
            
      (UA) and
            Skechers USA
            
      (SKX).

"Among the most widely traded companies, Nike has made the sharpest turn in strategy to address the millennial demographic and the changing landscape of shopping behaviors," Lyon says.

Nike stock, to be sure, looks pricey at 33 times earnings for the fiscal year ending in May, according to consensus estimates. Nike's five-year average price / earnings ratio of 23, and it's a steep premium to the market's P / E of 17. Still, Lyon notes that Nike's multiple growth has accelerated. Analysts expect year-over-year earnings growth to jump from 4.9% in fiscal 2019 to 19.2% in fiscal 2020.

The company's latest quarterly results are broad-based with 11% (in unadjusted currency terms) over the prior year.

Moreover, Nike is strong enough financially that it can afford to buy back of a large amount of its stock. It just embarked on a four-year plan to repurchase $ 15 billion worth of shares, about 11% of its $ 134 billion market value. The stock has advanced 15% this year to $ 85.50, but Lyon continues to be $ 96 over the next 12 months.

Quinones, who was picking up his sneakers at the Nike store in New York.

Visiting the store and seeing everything in action keeps him coming back. "It definitely makes me spend more money at Nike," he says.

Nicholas Jasinski contributed reporting.

Write to Daren Fonda at daren.fonda@barrons.com


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